A capital gain is a rise in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. Capital gains income is taxable, but may be taxed at a different rate than other forms of income (earned, retirement, dividend, etc.).
In Oklahoma, certain capital gains income is fully deductible from state income tax. The deduction allows taxpayers to exempt from their taxable income any gains from the sale of property located in Oklahoma or stock of a company headquartered in Oklahoma. To qualify for this exemption, the seller must have owned the property for at least five years or the stock for at least two years before the sale.
A 2017 report prepared for Oklahoma’s Incentive Evaluation Commission estimated that the capital gains tax deduction led to an estimated $474 million in forgone tax revenues from 2010 to 2014, while only creating $9 million in positive economic benefits. The report’s recommendation to repeal the capital gains deduction was rejected by the Commission. Legislation to repeal the capital gains deduction, SB 1086, passed the Senate in 2018 but was not taken up in the House.
The capital gains deduction cost the state $127.5 million in FY 2020, according to the Oklahoma Tax Commission.